Top hedge fund manager Sally Buffit believes that a stock with the same market risk as the S&P 500 will sell at year-end at a price of$49. The stock will pay a dividend at year-end of $3.00. Assume that risk-free Treasury securities currently offer an interest rate of2.1%.Average rates of return on Treasury bills, government bonds, and common stocks, 1900-2017 (figures in percent per year) are asfollows.Average AnnualRate of Return (%)Average Premium(Extra returnversus Treasurybills) (%)PortfolioTreasury billsTreasury bondsCommon stocks3.85.31.511.57.7a. What is the discount rate on the stock? (Enter your answer as a percent rounded to 2 decimal places.)Discount rateb. What price should she be willing to pay for the stock today? (Do not round intermediate calculations. Round your answer to 2decimal places.)

Given information: Stock price is $49 Year-end dividend is $3.00 Risk free rate is 2.1%

Answered: Top hedge fund manager Sally Buffit…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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